Tax Topics for Small Business Week – Depreciation

The 2018 Small Business Week started April 29, 2018 and runs through May 5, 2018. This annual event, hosted by the U.S. Small Business Administration, is the celebration of the contributions by entrepreneurs and small business owners.

I wanted to continue my series of posts related to the 2018 Small Business Week with some information about depreciation and expensing your fixed assets.

Small business owners were given a powerful tool to reduce their income by the Tax Cuts and Jobs Act (“TCJA”) by making it easier to expense your fixed asset purchases. What this means for you is that more of your fixed assets purchases can be fully expensed in the year you purchase them as opposed to slowing depreciating them over time. This can go a long way towards reducing your current year income which will make your income taxes go down.

In the old days, almost all of your fixed assets were depreciated over a number of years depending on the length of time the asset was expected to provide value to your business. In those days, you could elect to expense some assets in the current year under Internal Revenue Code Section 179, but the amount per year was very low and there were limits on this election. Congress came up with the concept of “bonus” depreciation to help business expense their purchases faster in order to spur business activity in the early 2000’s. Since then, there has been some form of bonus in almost every year.

I do want to point out that you are still capitalizing and depreciating your assets, it’s just that it is all in the same year. This means you still need to put the asset on your balance sheet and expense it through depreciation, rather than putting it in expense accounts, such as using your supplies expense account.

Here are some of the changes to depreciation that come from the TCJA:

  • The percentage of the asset’s cost that you can expense in the current year is 100% for tax assets purchased and placed in service after September 27, 2017 through 2022.
  • There is no annual limit on the amount of bonus depreciation that can be claimed on qualified property.
  • The types of qualifying property have been expanded, including the ability to take bonus on used property if it was used by an unrelated person and acquisition requirements are met.
  • The limit on depreciation for luxury automobiles is increased.

There is also a separate type of immediate expensing called Section 179. Technically this is the code section that allows the taxpayer an election to expense the asset and you will probably hear it in terms of your accountant saying you can take 179 on this or that specific asset. What they mean is you can make an election that allows you to deduct the cost of the property under certain conditions and a different set of limitation. Some of the limitations are:

  • The maximum amount you can elect to deduct in one year has been increased from $500,000 to $1,000,000.
  • The phase-out threshold has been increased from $2,000,000 to $2,500,000.
  • You can not elect to deduct more than the total amount of taxable income from your business. In other words, this deduction can’t create a tax loss for the business.

You should review your fixed asset purchases with your tax professional so you know what options you have and the best way to expense them for your business. There are different reasons why you would want to selection bonus depreciation versus section 179 but each business is going to have to do their own analysis to find the right option.